The Reserve Bank of India (RBI) has proposed fresh guidelines for all lenders about the levy of foreclosure charges and pre-payment penalties on loans, according to a draft circular issued on Friday.

"In terms of the extant instructions, certain categories of Regulated Entities (REs) are not permitted to levy foreclosure charges/ pre-payment penalties on the floating rate term loans sanctioned, for purposes other than business, to individual borrowers with or without co-obligate," read the draft circular.

"REs, other than Tier 1 and Tier 2 Primary (Urban) Co-operative Banks and Base Layer NBFCs, shall not levy any charges/ penalties in case of foreclosure/ pre-payment of floating rate loans granted to individuals and MSE borrowers, with or without co-obligate (s), for business purpose. However, in the case of MSE borrowers, these instructions shall be applicable up to the aggregate sanctioned limit of ₹7.50 crore per borrower," according to RBI.

Reserve Bank's supervisory reviews have indicated divergent practices amongst REs about the levy of foreclosure charges/ pre-payment penalties in case of loans sanctioned to MSEs which lead to customer grievances and disputes.

Moreover, certain REs have been found to include restrictive clauses in loan contracts/ agreements to deter borrowers from switching over to another lender, either for availing lower rates of interest or better terms of service